Money and Time

Money is purely a cultural invention. Money does not exist in nature, and no other species has been found to have anything approaching a genuine economy. Even humans did not have money during our evolutionary history. Historians estimate that money only came into being about 3,000 years ago (Weatherford, 1997). Nonetheless, its usefulness was quickly recognized. Money was rapidly adopted by one culture after another, and today all countries in the world have and use money.

Money is inherently prospective. Money stores value for some indeterminate point in the future.

To appreciate the prospective aspect of money, it is useful to contrast it with how trade occurred before money. Animals do not trade, but early humans seem to have figured out how to do it and enjoyed its benefits. A good trade makes both parties better off, and so there is an incentive for (or at least a benefit from) learning how to trade. Before money, however, trade was restricted to barter: Each person gave one of his or her possessions to the other.

That trade benefits both parties even without money is important to understand. The benefit stems from various reasons that economists have illuminated. To illustrate: A fishing village may catch more fish than it can consume or store, but it lacks grains. Nearby, perhaps, a farming village grows more grain than it needs, but it lacks fish. If they trade, both are better off, not least because their diets improve. More important, each side gets something more valuable than it gives up. The people in the fishing village already had enough fish, and the surplus would have been wasted, but instead of letting the fish rot, they can trade them for something they want and need.

But notice the drawbacks of barter. It is only possible when and because both sides have something the other wants. Moreover, as the fish example reveals, what one has to barter might not last very long. The surplus fish need to be traded right away, for whatever happens to be available. The trading partner likely knows this and can use it to get a better bargain. For example, if traders are offering knives in exchange for fish, they know their knives will still be good next week, whereas the fish will be useless by then. They knows the alternatives for those who caught the fish are to get something or nothing, and so the people in the fishing village are better off making even an unfair deal than no deal.

Still, the prospects for barter are often limited. If you have fish, and the other person has knives, you might make a trade. But then suppose you already have a knife? You want to unload your fish before they go bad, but you don't need any more knives. The other person doesn't have anything else to offer, so no trade is made.

Money solves all these problems. Money, unlike fish, does not expire in a few days. Money does gradually lose value in many cases, as governments print more of it, but it took ancient civilizations many centuries to understand this. Hence money seemed like a safe and permanent store of value, even if little by little its value did erode, mostly unnoticed. So instead of trading something that would quickly lose its value, one could trade for money, which seemingly would retain its value into the indefinite future (and money doesn't have to be refrigerated).

Thus, money is inherently prospective. With barter, each side has to get something that it wants, or else there is no deal. With money, only one party gets a good or service that he or she wants. The other gets money, which can be kept for a long time and then exchanged for something else—something not yet wanted or envisioned. Money is a repository of value in the future. Without the future, money would not have been invented.

The uses of money have likewise built heavily on prospection. Capital markets enabled people (and large groups of people) to spend more money than they have, because they can borrow the money now and pay it back in the future. Some economic historians think the Dutch windmills were an important spur to this innovation (Bernstein, 2004). Farmers could benefit from windmills for draining fields and managing water. But the farmers were quite poor, and none would ever have been able to save enough money to pay for building a windmill. (Indeed, the windmill was essential for creating profits, so without it, their chances of saving were even slimmer and grimmer.) But a farmer could borrow the money to build the windmill and pay back the loan over many years with the increased profits that the windmill made possible. Again, everyone was better off.

Over time, money's many uses have become even more future- oriented. Credit card debt, long-term investments, tax planning, pension plans, mortgages and reverse mortgages, amortization, and plenty of other phenomena involve the prospective application of money.

We have also emphasized that trust is inherently about the future. Money is about trust. Indeed, it has become a truism in economics that all financial transactions require some degree of trust. Money enables people to have mutually beneficial interactions with complete strangers, something that has proven elusive in nonhuman nature. But some trust is required. You purchase a meal from a restaurant with money. You trust that the food will be what you ordered and that it has been properly protected from infections and contaminations that might poison you. You trust you will get the quantity that you paid for. The restaurant owners also trust you: Not least, they serve the food and let you eat it before they see any of your money, so they trusted that you would pay your bill. They may also trust that you will not only pay the agreed price, but that you will use real rather than counterfeit money. The waitperson trusts that you will give a suitable tip. And so on.

Trust is sustained partly by other prospective factors. In the modern economy, law enforcement helps to sustain trust, because those who betray the trust can be prosecuted. That is why trust is lower and deals become harder to arrange in cases when the government is not available to step in and punish anyone who fails to do what he or she was trusted to do. Illegal drug deals, for example, are far more precarious than restaurant meals. If your dealer sells you phony cocaine, you cannot really go to the police for help in getting your money back, unlike what happens if the restaurant serves you phony food.

Effective law enforcement is a recent invention. Yet economic trade began centuries earlier and indeed flourished. How was trust sustained then? The answer to that involves another social phenomenon, which the next section will address.

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